The Role of Banks - Loan Brokerage

An important role of banks will be to match the savings of their depositors who want to lend with those who want to borrow. Each loan would be matched with a deposit or group of deposits with the same term. Every loan and every deposit will a timestamp on it. Each loan with a particular timestamp will have to matched by a deposit or group of deposits with same date/timestamp on it.

Interest rates for various terms will adjust, so that the supply of deposits matches the demand for loans for each term, ie to clear the market. The bank will charge a margin on the interest rate to cover the cost of this service. Banks would take responsibility for assessing the credit-worthiness of potential borrowers and the viability of the projects for which they are borrowing.

The bank could also agree to take responsibility for bad debt. The cost of this service would be built into the bank's charge. Sometimes the bank may need to combine a number of deposits together to supply a large loan. This would be part of the brokerage service.

Part of this brokerage function will be organising the re-financing of loans. Sometimes a person will have placed money in a bank for fixed term. It will have been lent out to another person for the same time. If the depositor’s situation changes and they need the money, they may want to withdraw it early. This would be possible but there may be a cost.

The bank would have to be able to replace the money with a deposit from a new lender. The bank would have a charge to cover the work involved in refinancing the loan. If the market interest rate had fallen, the first lender may also have to cover the differential for the rest of the term. The cost should be small, as in a sound financial system interest rates would be very stable.

Loaned money on fixed term cannot be paid back early unless another lender has been found to take over the loan. Therefore there is no need for banks to hold cash reserves.

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